Does ‘Chaos’ Rule the Global Supply Chain?

Shipping container shortages in Asia, traffic jams at ports, limited availability of dockworkers and truck drivers from Southern California to Singapore, higher shipping prices—all are part of a now-stretched supply chain due to the pandemic, according to a recent New York Times report. What is the impact on rail?

“‘I’ve never seen anything like this,’” Lars Mikael Jensen, head of Global Ocean Network at A.P. Moller-Maersk, the world’s largest shipping company, told The New York Times, which included his quote in the headline of a March 7 feature, “‘I’ve Never Seen Anything Like This’: Chaos Strikes Global Shipping.” 

“‘All the links in the supply chain are stretched,’” he said. “‘The ships, the trucks, the warehouses.”

With Americans increasingly ordering online, there has been “a surge of orders from factories in China, much of it carried across the Pacific in containers,” the Times reported. And shipping demand has “outstripped the availability of containers in Asia, yielding shortages there just as the boxes pile up at American ports.”

Not helping matters: Containers that carried millions of masks to “Africa and South America early in the pandemic remain there, empty and uncollected,” for example. Why? “Shipping carriers have concentrated their vessels on their most popular routes—those linking North America and Europe to Asia,” the Times noted. While Australia and New Zealand are seeing pileups, too, India’s port of Kolkata has a shortage, “forcing makers of electronics parts to truck their wares more than 1,000 miles west to the port of Mumbai, where the supply is better,” according to the Times.

Shipping companies have seen benefits, according to the newspaper, which pointed out that in February, Maersk “cited record-high freight prices in reporting more than $2.7 billion in pretax earnings in the last three months of 2020.”

Additionally, “economies around the globe are absorbing the ripple effects of the disruption on the seas,” the Times reported. “Higher costs for transporting American grain and soybeans across the Pacific threaten to increase food prices in Asia.”

How long will the disruption last? According to the Times, “No one knows, though some experts assume containers will remain scarce through the end of the year, as the factories that make them—nearly all of them in China—scramble to catch up with demand.”

The Times, however, did not fully explore the effects of the disruption on an important link in the global supply chain: freight rail, specifically, intermodal. Railway Age asked Contributing Editor Jim Blaze to weigh in. Now an independent railway economist and consultant, Blaze’s 40-year industry career includes a half-decade of global supply chain experience, and an ocean container-vs.-rail master’s degree thesis.  

“While there is indeed a headline supply chain disruption under way, as reported by economics journalist Peter S. Goodman and his colleagues (and others like Lori Ann LaRocca at CNBC), the history of logistics is scattered with such occasional disruptive trade patterns,” Blaze told Railway Age. Following are his observations on how the 2020-21 disruption is affecting rail freight: 

“The loss of U.S. export grain markets’ intermodal service toward Asia serves as a reminder about backhaul economics,” Blaze pointed out. “We need to admit that there is a hard asset market loss risk when the commodity is not a head-haul-valuable opportunity. 

“As in this [Times] example: ‘Scoular, one of the largest agricultural exporters in the U.S., loads grain and soybeans into containers at terminals like Chicago and Kansas City, and then sends them by rail to Pacific ports en route to Asia. Given the prices fetched by containers in Asia, the ocean carriers are increasingly unloading in California, and then immediately putting the empty boxes back on ships for the return leg to Asia, without waiting to load grain or other American exports.’ Indeed, that has disrupted the export opportunity for companies like Scoular. 

“But being a backhaul ‘filler’ customer comes with risks when markets are disrupted in the head-haul direction. This is nothing new in the history of trade routes. Those risks should have been vetted in their business-case due diligence.”

How will the disruption end? “The contrary opinion is that economic cycles for commodity staples do try to revert to their normal averages (the mathematical mean),” Blaze told Railway Age. “If you run cycles out on a graph over multiple decades, you see the ups and downs in a trend line. Those cycling patterns signal both occasional surplus and shortage risks. The risks are magnified when distances and so-called ‘just-in-time’ supply chains are linked as the presumed low-cost distribution tactics. Diversification and forward inventory stocks are classical solutions. This logistics generation didn’t think that through very well.”

And what about recovery? “I predict that global ‘buyers’ at the delivery end of the supply chains will act to rebalance their logistics costs and reliability,” Blaze said. “How? They will change both supply sourcing and transport hub (port and rail link) geography. Shippers will logistically diversify in the longer run, as many did after the West Coast labor strike nearly a decade ago.”

There will also be railroad business consequences, Blaze said. “Many economists believe that long-distance double-stack rail moves will eventually see some significant loss of market share from the western carriers, BNSF and Union Pacific, to the eastern carriers, Norfolk Southern and CSX,” he noted. “After this past year, the pace of that shift will likely accelerate. Such maritime/rail container trade lane shifts may also impact in some volume manner or growth-rate change the other intermodal role players like J.B. Hunt and Hub Group. Why? Because so many maritime smaller-cubic-capacity TEU (20-foot-equivalent unit) and FEU (40-foot-equivalent unit) containers are transloaded at ports like Los Angeles and Long Beach to much larger cubic capacity 53-foot domestic boxes for long-distance rail moves. That is part of the intermodal logistics story. Furthermore, intermodal impacts will appear in multiple ways to the supply chain players beyond just the coastal ports. Even places like Joliet’s [Illinois] massive rail intermodal complex will see changes as shippers respond. That is part of the possible rest of the story, according to this old economist.”